Major changes are expected in the role of network APIs

By Dimitris Mavrakis

The mobile industry is currently undergoing an evolution and is experiencing major changes at every level of the value chain.

The continued decline of voice revenues is pushing mobile operators to turn to data services for new revenue opportunities, but traffic growth has outpaced revenues and networks are currently in a need of new revenue streams to support infrastructure upgrades. Operator “walled gardens” have failed to attract customers while the operators are under pressure from shareholders to justify the investments they made for upgrading their access networks for next-generation data services. A number of tier 1 operators have now openly admitted that they will not be able to create these services themselves and expect to employ third parties in the value chain to create best-of-breed services with sustainable business models.

At the same time, handset manufacturers report that they are no longer able to rely on handset sales to sustain their revenue growth. They are looking for new revenue opportunities and starting to offer services themselves through app stores or branded Web services (e-mail, IM). This development is now putting additional pressure on operators either to react and compete against handset vendors and Web services, or remain stationary while third parties cannibalize their revenues and relegate them to bit pipes. Internet players are also combining the multitude of content on Internet with mobility to create engaging applications and experiences for mobile subscribers.

All these dynamics are currently reshaping the whole mobile industry and challenging operators to retain control over the mobile service ecosystem. The most noticeable changes of the last two years are:

• Mobile broadband networks are starting to saturate, forcing operators to upgrade current networks or plan technology upgrades.
• As traffic and revenues decouple, mobile operators realise that mobile broadband will not be able to balance capex requirements for next generation networks.
• Device vendors, Web companies and third parties are entering the mobile value chain, relegating mobile operators to bit pipes.
• The success of Apple’s App Store has made operators aware of the benefits that their own app store could offer them; several mobile operators have already launched an app store or are in a planning phase.
• Mobile operators are turning to secondary sources of revenue that do not require significant capex to implement.
• Network APIs are the subject of increasing interest in the mobile market as they have the potential to enable a variety of new business models, including app stores and two-sided business models.
• Tier 1 mobile operators are attempting to become service enablers and break free of the bit pipe concept.
• Telenor is the most successful mobile operator that has included APIs in its business models, generating approximately US$126 million annually through its third-party access initiative.
• Orange Partner is the market leader in open APIs, having released 24 APIs for developers, enterprise customers and Web service providers.

Network APIs have become synonymous with new, secondary revenue opportunities for operators while a large part of the market is still trying to understand their strategic, technical and cultural implications. Network APIs are not a new concept, but have been present in the mobile market since mobile operators had to interface with third parties. However, operators traditionally required strict contractual agreements and long, arduous processes which did not allow individual developers to access APIs. All this is now changing, making the operator a more open, transparent company for third parties, but the drive to open APIs is coming from developments in the value chain and threats to the mobile operator business model.

Mobile market overview

The mobile value chain is evolving and starting to rely on data rather than voice to create new revenue opportunities. The runaway success of USB modems and the iPhone 3G have helped to make mobile broadband one of the most important strategic and commercial opportunities in the mobile industry. Operators in every region are turning mobile broadband into both a substantial new revenue stream and a strategic opportunity to accelerate the transformation of the mobile industry into the mobile Internet industry, via a range of new alliances with PC and consumer electronics vendors, fixed broadband operators and Internet application providers.

Mobile operators have learned that their move into the portable market comes at the cost of booming traffic. Infrastructure vendors are claiming that mobile broadband subscribers using portable devices represent 5% of total subscribers on some operator networks, but are generating more than 90% of the total traffic.

For the medium to long term, operators accept that they will need to upgrade their mobile broadband networks to support faster data speeds, higher capacity and a lower cost per megabyte. However, as traffic and revenues decouple mobile broadband revenues may not be able to sustain capex requirements and operators will need to find additional revenue streams to fund their upgrades. Emerging markets are injecting new life into business models for tier 1 international operators while bundling fixed-replacement services with mobile products has enabled these operators to differentiate themselves and retain customers.

However, penetrating new market segments or upgrading existing customers with new services requires significant capex and marketing. Strategies for fixed and emerging markets both require new infrastructure, rollouts and marketing campaigns to push new products into the marketplace while their success is not guaranteed. As such, in parallel with the organic growth in the mobile market, operators are attempting to create secondary business and revenue opportunities that do not require significant capex but extract additional value from infrastructure already installed in current networks. Opening their networks through open APIs will ultimately enable them to achieve their goal but they will have to build solid strategies and sustainable business models in order to monetize open APIs.

Network APIs

Network APIs capitalize on existing infrastructure to create a plethora of business opportunities for mobile operators. Effectively offering telecoms functionality to third parties, network APIs enable billing, messaging, location and a variety other operator-specific functionality for third parties that can now create applications for mobile handsets and the Web. Network APIs allow operators to disseminate the wealth of information they hold internally for their subscribers and connect third parties to their precious billing platforms. In effect, individual developers are offered a route to market that was previously possible only through device vendors and their app stores. The ongoing battle between mobile operators and handset manufacturers is proving a challenge for both parties, where mobile operators are still lagging behind handset manufacturers for app stores, but the latter can only target few high-end handsets – when operators have the potential to access a larger subscriber group.

Network APIs have been present in the market since before the turn of the century and have been widely used to interface preferred partners to mobile networks. However, these APIs relied on telecoms-grade protocols that were complex, telecoms specific and not developer friendly. Developers have been accustomed to Web-based protocols and languages, making their transition to the mobile market a time-consuming and difficult process. Moreover, payment cycles for individual developers have been anything up to nine months, alienating them further from the mobile market and killing any potential business model for developing applications.

However, several factors are now pushing operators to become more open and network APIs are the first step towards becoming transparent. The evolution of hardware and the emergence of specialist vendors are allowing operators to interface internal infrastructure (that speaks telecoms-grade protocols) with the Web world through scalable, secure and adaptive middleware products. As such, developers can now create applications in software and languages they are familiar in the Web world. Web protocols, including REST, SOAP, Web Service Description Language (WSDL) and XML are used to access network APIs, thus attracting the developers’ attention to mobile operators. As the tide begins to turn, individual developers are shifting their focus towards mobile operators that are now more accessible and with the potential to connect their applications with millions of subscribers. Individual developers are flocking to mobile operator developer communities and starting to create applications that use network APIs.

The most lucrative business model for network APIs does not rely on individual developers to generate revenues. Two-sided business models are now introduced in the value chain, where mobile operators can charge both downstream and upstream:

• Downstream: As usual, mobile subscribers are charged for access, generating traffic and service revenues for mobile operators.
• Upstream: A new value opportunity, where mobile operators become service enablers for third parties. Significant revenue opportunities for enterprise clients, vertical segments and government applications, where clients can embed telecoms functionality in existing software, including fleet management, CRM and sales support. There is also the potential to interface with content providers, giving them access to the mobile market.

However, few operators have reported significant revenues from two-sided business models, with the exception of Telenor Norway, which is estimated to be generating US$126 million annually – 6% of its mobile revenues in Norway – and additional traffic from its Content Provide Access initiative. Orange Partner has also launched a two-sided business model with its APIs in France but is not expected to be generating a profit, revenues are estimated to be covering support costs.

Furthermore, mobile operators that aim to attract content providers with API initiatives currently may not be as successful as a content provider that has an interest in the mobile market – this content provider will have already chosen a route to the mobile market, possibly through an operator portal or third-party content aggregators that sell content to mobile operators. However, interfacing with enterprise clients, vertical segment service providers and government departments brings new opportunities for new services and revenues.

Web companies moving in the mobile value chain

The mobile market is now an open marketplace, where service providers from the Web are attempting to attract user attention and cannibalize operator revenues. Several companies have implemented a mobile strategy but the entrance of Google in the market with Android and, more recently, Google Voice is starting to worry the mobile operators – they may see their precious networks become a data pipe for third-party service providers. Similar attempts to enter the mobile value chain are exercised by Skype, several VoIP service providers and other companies that have traditionally relied on the Web to generate revenues.

Moreover, the success of the Web in creating applications and its long standing relationship with developers indicates that operators will not be able to keep up with the evolution of Web-based services. Especially those operators that have exercised complete control over the handsets they allow on their networks will find that their subscribers will turn to the Web for new services and mashups, while their own monolithic services will be used for simple data and voice access. However, there are some mobile operators – notably Japanese and Korean operators – that have the technical expertise, innovation and deep understanding of their own market that will allow them to remain a force in the mobile market and displace any Web companies that attempt to cannibalize their revenues. For the rest of the developed markets around the world, mobile operators will be subject to increasing competition from Web-based service providers and are now realizing that they have to act and choose between a smart-pipe or dumb-pipe long-term strategy.

In addition to Web service providers, several social networking utilities are attempting to enter the mobile market, disassociating the user from the mobile operator and making them loyal to services instead of the network. Facebook and Twitter are two examples of services that are now accessible through mobile networks while Facebook’s downloadable applications for smartphones can access device APIs to offer a compelling user experience. Some mobile operators rely on handset differentiation to succeed, including 3 UK that is offering INQ handsets that have social networking software installed so that users can access these services easily. In this case, the operator builds loyalty through handsets and third-party customization; however, tier 1 operators prefer to rely on their own assets to maintain end-user loyalty while reducing churn. In the new mobile market, mobile operators are trying to maintain their brand as the most recognizable against Web service providers, social networks and device vendors, which are evolving to become service providers themselves.

Device vendors becoming service providers

Handset manufacturers have come to realize that the relationship they have with end users can be extended after the point of sale and that they can use the direct contact they have with mobile subscribers to introduce their own services. As such, device vendors are now attempting to become application providers themselves and either installing embedded software on handsets or prompting users to download software and install it at the own leisure. In either case, device vendors are capitalizing on the expertise they have on handsets and the mobile user experience as well as rich-handset APIs to create engaging applications that have previously been unreachable for end users.

The most notable example of a device vendor turning service provider is Apple, which has revolutionized the mobile market twice: once with its iPhone handset and again with its App Store and its unique open culture and seamless route to market and millions of subscribers. Apple’s unique services take advantage of the intuitiveness of the iPhone’s UI and rich device API to offer new possibilities for end users and are setting the standard for the user experience. Although mobile operators cannot compete with such applications, however, they argue that the iPhone represents a market share that is miniscule compared with other smartphones, particularly Nokia’s.

Nokia has also introduced Ovi, an umbrella portal which includes e-mail, music, games, social network, photo sharing and various other services that are integrated in its high-end handsets. Although Nokia is not able to command a service fee like Apple has, its entrance in the services segment illustrates that the Finnish giant expects that services will provide additional revenue opportunities for handset vendors. Handset vendors’ expertise in mobile experiences and devices is expected to be a major factor for creating attractive apps but this will be limited to high-end smartphones. Nevertheless, mobile operators are now subject to competition from the handset vendors, a major shift in the market where previously mobile operators commanded handset value chain by mandating device requirements and software that was allowed to be preloaded. Moreover, end users are not sympathetic to operators’ attempts to protect their assets and are irritated when an operator removes a desirable function of a handset or blocks a service. Examples include Orange directing Nokia to remove its Music Store from handsets that the operator was to sell and T-Mobile blocking VoIP packets in its mobile network.

Mobile operators are standing by, watching as handset vendors are entering the content and applications market and – in several cases – offering services that compete directly with the operators’. Although openness is not a key element in their culture, mobile operators are now attempting to compete against third parties offering services and are struggling to become a smart pipe.

The app store phenomenon

The majority of tier 1 handset vendors are following Apple’s lead and attempting to operate their own unique app stores. Nokia has introduced the Ovi Store while RIM has created the Blackberry App World, an app store similar to Apple’s. Google also has an interest in the mobile market, with its Android operating system and its Android Market app store.

Nokia has been the most aggressive of the traditional handset players on the content front, exemplified by the introduction of its Ovi mobile Internet offering. But neither Nokia nor any other traditional player has the head start that Apple has in digital-content downloads and payments, in the shape of iTunes computer software. Nokia is hoping to bill for Ovi content through operators but is finding that integration with the operator billing mechanism is a complicated, time-consuming process that has to be replicated for each operator the Finnish vendor partners with.

Apart from Nokia and Apple, most tier 1 handset manufacturers have planned their own app store, including Samsung, LG, Sony-Ericsson and RIM. Mobile operators that have similar plans include Orange, Vodafone, China Mobile, Verizon, Turkcell, and AT&T. Each app store targets a different user group. There are several other app stores in the market from third parties, including Qualcomm BREW, GetJar, Cellmania, Motricity, Handmark, Handango and SurfKitchen, that interface directly with mobile operators and aggregate applications from several developers. However, none of these can access network APIs while the industry is attempting to reduce the number of middlemen between mobile operators and developers.

However, mobile app stores may not offer the revenue amounts and returns the mobile industry is expecting. Apple’s App Store is estimated to have generated approximately US$150 million for the American vendor, a marginal amount compared with iPhone revenues. However, profit margins on app store revenues are significantly higher than any other business unit since there are no costs apart from infrastructure to support the app store. Moreover, the business model is highly scalable and can create revenues with minimal human intervention (only needed when an application is to be approved for the app store and for customer support enquiries).

Even through an app store may not generate profits in the short term, value-added benefits for mobile operators include churn reduction and increased customer loyalty that can only be generated through service customization. Mobile operators are now aiming to use app stores to target the “long tail” of consumer applications and cater for several small user groups.

The new value chain

The new mobile value chain includes handset vendors, Web service providers and third parties offering their own services and attempting to disassociate the end user experience with the operator brand. The value chain is now an open competitive landscape that pits operators against the new service providers, while mobile operators are in danger of becoming data pipes, or utility providers for third parties to offer services.

Mobile operators are attempting to proactively counter handset vendor and Web services either by introducing their own services or becoming smart pipes: service enablers for third parties where the operator has complete control over the service delivery and management process and demands a revenue share from all sales that take place over the mobile network.

However, becoming a smart pipe is a challenging procedure that requires a commitment of effort and capital as well as a radical change in the internal culture. Although most tier 1 operators have the potential and assets to become smart pipes, they are currently still assessing evolution scenarios. Vodafone, Telefonica, T-Mobile, Verizon Wireless, China Mobile and Orange are tier 1 mobile operators that are expected to become smart pipes in the long term, but only mobile operators in saturated markets are expected to make an effort to become service enablers or providers in the short term. Developing markets, including China, will sustain organic growth for China Mobile and other operators and will not necessitate the use of secondary business models to support infrastructure upgrades and new revenue opportunities. On the other hand, operators in the developed markets of Western Europe and North America are now attempting to become service enablers and compete against Web players and device vendors.

The Mobile Network APIs report from Informa Telecoms & Media, provides a detailed evaluation of open network APIs and how operators can utilise them to successfully extract additional value from their existing networks. For more information please visit www.informatm.com/api